Capital structure decisions: Evidence from deregulated industries

Deregulation significantly affects the firms’ operating environment and leverage decisions. Firms experience a significant decline in profitability, asset tangibility and a significant increase in growth opportunities following deregulation. Firms respond by reducing leverage. Deregulation also significantly affects the cross-sectional relation between leverage and its determinants. Leverage is much less negatively correlated with profitability and market-to-book and much more positively (negatively) correlated with firm size (earnings volatility) following deregulation. These results are consistent with the dynamic tradeoff theory of capital structure. Also consistent with the dynamic tradeoff theory, those firms that are more likely to be above their target capital structure issue significantly more equity in the first few years following deregulation.     

Capital structure in the Chilean corporate sector: Revisiting the stylized facts

The purpose of this paper is to analyze the traditional drivers of the capital structure, in addition to others particularities of the Chilean corporate sector. Using panel data methodology, this study examines the potential drivers of the capital structure in a sample of 157 Chilean firms. To do that, this study also includes variables not commonly used in the literature (e.g. ownership concentration, business groups affiliation, and dividends), as distinctive elements of the Chilean corporate sector. Our results show a positive effect of firm size and ownership concentration on firms leverage; as well as a negative effect of the pay-out policy, growth opportunities, non-debt tax shields, and profitability on the leverage. Some expected relationships in the Anglo-Saxon context are also curiously observed in Chile. Nevertheless, there are some relations that are not in line with the current literature such as the negative relationship between asset tangibility and leverage. Finally, firms’ affiliation to economic groups allows them to take advantage of internal capital markets, increasing leverage. This suggests that some of the insights from the current theoretical bodies are not portable across countries, and consequently, much remains to be done in order to understand the impact of different institutional features on capital structure choices.Emerging markets provide a challenge to existing models that need to be reformulated to accommodate the characteristics of these markets. This study contributes in this direction by taking into consideration the particularities of an emerging Latin American Economy.     

Firm growth type and capital structure persistence

We find that growth type (identified by a two-way sort on firm initial market-to-book ratio and asset tangibility) can parsimoniously predict significantly dispersed and persistently distinct future leverage ratios. Growth type is persistent; growth-type-sorted cross-sections of corporate fundamental variables (such as tangible versus intangible investment style) are also meaningfully persistent. As economic and market conditions improve, low growth type firms are keener to issue new debt than equity, whereas high growth type firms are least likely to issue debt and keenest to issue equity. These findings demonstrate that firms rationally invest and seek financing in a manner compatible with their growth types. Consistent with a generalized Myers–Majluf framework, growth type compatibility enables distinct growth types and hence specifications of market imperfection or informational environments to persist. Growth type is apparently a fundamental factor for capital structure persistence.     

Capital Structure Choice in a Nascent Market: Evidence from Listed Firms in China

We study the capital structure decisions of listed firms in China between 1992 and 2001. The Chinese market exhibits high information asymmetry, phenomenal growth, highly concentrated ownership, and a lack of external market for corporate control. We find that Chinese firms use little long-term debt, which is positively (negatively) related to firm size and tangibility (profitability and growth options). These results are robust to the degree of seasoning after the initial public offering and private versus State ownership. Although industry membership is important, the development and growth of the stock market did not affect the long-term debt ratios over the years.     

Political Patronage and Capital Structure in China

In this paper, we empirically examine the determinants of capital structure in China, using 1,006,395 firm-year observations spanning 1998-2007. Consistent with the general findings in developed markets, we find that the long-term debt ratio is positively related to firm size and asset tangibility while negatively related to profitability and growth opportunities. We also conclude that the long-term debt ratio is positively related to state ownership and legal-person institutional ownership, consistent with the political patronage hypothesis that firms in which the government has more of a stake are more likely to incur long-term debts. These results are robust to a battery of validity checks.     

Sources of Financing,Profitability and Productivity: First Evidence from Matched Firms

This paper contributes to the literature on capital structure and firm performance. Using firm‐level data covering over 11,000 firms from 47 countries over a recent period of 1997‐2007, we address the effect of different sources of financing on corporate performance, employing a matching process, which allows an adequate `like‐for‐like’ comparison between high and low level of financing by firms. Robust to different matching estimators, the main findings are consistent with the theories of capital structure, in that firms with high debt‐to‐equity ratio tend to have lower returns to shareholders (profitability) and lower internal efficiency (productivity). The results become more robust when we separate the firms into advanced and emerging country‐groups or countries with high/low levels of financial development. Given the lower level of leverage below 50% on average in emerging markets (or in countries with lower level of financial reforms), firms in these economies face lower risk of financial distress and thereby less adverse effect on firm profitability and productivity, relative to their counterparts in advanced economies. We also find that retained earnings and equity financing improve performance, while debt financing by firms particularly in the form of bank loans leads to lower performance, although not so in the case of debt raised through issuing bonds.     

Why Have Debt Ratios Increased for Firms in Emerging Markets?

I study trends in capital structure between 1980 and 2004 in a sample of over 11,000 firms from 34 emerging markets. The average firm's market‐value debt ratio rose by 15 percentage points over this quarter century. I study how this rise in leverage was influenced by firm‐level factors and by the availability of debt financing at the country level. The central finding is that the increase in debt ratios can largely be attributed to changes in the characteristics of emerging market firms over this period. For the average firm, the most prominent determinants of capital structure – size, profitability, asset tangibility, and growth opportunities – all shifted in the direction implying a higher optimal level of debt. At the country level, increased financial development within the country is associated with lower debt ratios, but increased financial openness to foreign markets is associated with higher debt ratios.     

Small Firm Capital Structure and the Syndicated Loan Market

We show that small firms using syndicated loans for their mid- and long-term financial needs have significantly higher leverage than firms that do not borrow in this market. This difference cannot be attributed to firm characteristics like the availability of growth opportunities, asset tangibility, R&D spending, profitability and net sales that are known to influence capital structure. We also find that the capital structure of other firms that borrow in the syndicated loan market is not different from those that do not. We show that already highly leveraged small firms are more likely to borrow in the syndicated loan market than other firms. The higher debt in the capital structure of small firms that rely on syndicated loans consequently can be attributed to the availability of capital rather than demand for capital, as shown more generally by Faulkender and Petersen (Rev Financ Stud 19(1):45?C79, 2006).     

Shareholders' control rights,family ownership and the firm's leverage decisions

We investigate the association between controlling shareholders' ownership (CS_Own) and firms' leverage decisions in the Singaporean context. We examine whether the impact of ownership concentration on leverage differs across excess and lower control. We report that shareholders with excess control prefer leverage financing for an optimal capital structure and focus on value maximisation rather using leverage as a tool of minority shareholders' expropriation. Our analysis shows that firms capital structure significantly influences by the coalition of shareholders particularly decisions about leverage financing in addition to the firms' specific characteristics and institutional arrangements. Our empirical evidence shows that controlling shareholders with a lower fraction of equity are more concerned about limited holding thus prefer leverage over equity financing to inflate their equity stake to protect them from the potential takeovers and mergers. We report that capital structure decisions in Singapore are linked with the trade-off between the controlling shareholders' target of mitigating firm risk and their non-dilution entrenchment needs. Further, we found an inverted U-shaped association between control ownership and leverage financing. In terms of moderating effect of family-controlled ownership, our findings exhibit that leverage financing is less pronounced for family firms in Singapore due to the under-diversified investment portfolio.     

Does financing influence the sensitivity of cash and investment to asset tangibility?

Research shows that asset tangibility substantially impacts firms’ cash levels and investment. Using the deregulation of equity issuance in the U.S. as an exogenous shock to access to equity markets, we investigate the influence of financing on the dependence of cash and investment on asset tangibility. We show that financing dampens the sensitivity of cash and investment to asset tangibility, and promotes investment and firm growth. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up. This provides evidence that public firms even in well-developed financial markets such as the U.S. benefit from financial deregulation that removes barriers to external financing, shedding light on the role of financial markets in fostering growth.     

资产专用性与公司资本结构——来自中国制造业股份有限公司的经验证据

交易成本经济学视角下的公司融资理论指出,债务与权益应该视为不同类型的“治理结构”,而这种治理结构的具体选择又主要取决于公司资产专用性。我们以2001—2003年我国制造业股份有限公司为研究对象,运用多元线性回归计量模型实证表明,公司资本结构与资产专用性和盈利能力负相关,但公司盈利能力与资产专用性正相关。因此,公司资本结构的决策不仅要考虑公司资产投资具有专用性的特点,而且还要考虑其自身的盈利能力,才可能在激烈的产品市场竞争中获得可持续竞争优势与优良绩效。     

The firm-specific determinants of capital structure – An empirical analysis of firms before and during the Euro Crisis

This paper intends to address the effects of firm-specific characteristics on the formation of capital structure amongst a balanced panel sample of 559 firms in six European countries before and during the period of 1999–2015. We find that growth, profitability, tax shields and the effects of the Euro Crisis are significantly negatively related to leverage plus debt-to-equity ratio and are significantly positively correlated with net equity. Additionally, we detect that size, asset tangibility, non-debt tax shields and earnings volatility are significantly positively correlated with leverage along with debt-to-equity ratio and have a significantly negatively relation with net equity. Our model tests the effectivity of trade-off, pecking order and agency cost theories of capital structure. Besides, we divide the full sample into three subsamples illustrating different industries of retail trade and services, manufacturing and construction plus transportation and tourism. We find that the transportation and tourism industry is more negatively impacted by the Euro Crisis than the other two industries.     

How Entrenchment, Incentives and Governance Influence REIT Capital Structure

Although recent literature has confirmed the importance of viewing a firm??s capital structure choices of leverage and debt maturity as jointly determined, to date there has been little analysis of the importance of traditional governance variables on a firm??s capital structure decisions using a simultaneous equations approach. We examine the influence of managerial incentives, traditional managerial monitoring mechanisms and managerial entrenchment on the capital structure of Real Estate Investment Trusts (REITs). Using panel data, we estimate a system of simultaneous equations for leverage and maturity and find that firms with entrenched CEOs use less leverage and shorter maturity debt. This is consistent with the expectation that managers acting in their own self interest will choose lower leverage to reduce liquidity risk and use short maturity debt to preserve their ability to enhance their compensation and reputations by empire building. We also find evidence that traditional alignment mechanisms such as equity and option ownership have an offsetting effect; and that firms where the founder serves as CEO choose higher leverage and longer maturity debt. The results also provide evidence that leverage and maturity are substitutes, firms with high profitability and growth opportunities use less leverage and firms with liquid assets use more leverage and longer maturity debt.     

Debt maturity structure of Chinese companies

Numerous studies have focused on the theoretical and empirical aspects of corporate capital structure since the 1960s. As a new branch of capital structure, however, debt maturity structure has not yet received as much attention as the debt-equity choice. We use the existing theories of corporate debt maturity to investigate the potential determinants of debt maturity of the Chinese listed firms. In addition to the traditional estimation methods, the system-GMM technique is used to explicitly control for the endogeneity problem. We find that the size of the firm, asset maturity and liquidity have significant effects in extending the maturity of debt employed by Chinese companies. The amount of collateralized assets and growth opportunities also tend to be important. However, proxies for a firm's quality and effective tax rate apparently report mixed or unexpected results. Debt market and equity market conditions are also examined in relation to corporate loan maturity. The system-GMM results show that market factors seem to influence debt maturity decisions. Finally, corporate equity ownership structure has also been found to have some impact on debt maturity mix.     

Government ownership and the capital structure of firms: Analysis of an institutional context from China

Emerging economies provide interesting scenarios for examining how institutional context influences the financing behavior of firms. In this study, we examine the capital structure of Chinese listed firms following the Split-Share Structure Reform of 2005. This reform allowed a reduction of government ownership by making government shares tradable. We find that the impact of government ownership on leverage is dependent on whether the government is the largest shareholder in a firm and whether the government ownership is through a parent state-owned enterprise. In addition, we document that the largest non-government shareholder positively influences leverage. Overall, our results reveal that the largest controlling shareholder, either government or non-government, has a significant impact on the capital structure of Chinese firms.     

Corporate Governance and Capital Structure Dynamics

We develop a dynamic tradeoff model to examine the importance of manager–shareholder conflicts in capital structure choice. In the model, firms face taxation, refinancing costs, and liquidation costs. Managers own a fraction of the firms’ equity, capture part of the free cash flow to equity as private benefits, and have control over financing decisions. Using data on leverage choices and the model's predictions for different statistical moments of leverage, we find that agency costs of 1.5% of equity value on average are sufficient to resolve the low‐leverage puzzle and to explain the dynamics of leverage ratios. Our estimates also reveal that agency costs vary significantly across firms and correlate with commonly used proxies for corporate governance.     

A macroeconomic approach to corporate capital structure

The cross-sectional distribution of corporate capital structure and its macroeconomic implications are underexplored research areas. This paper embeds a dynamic trade-off theory of firm financing into a general equilibrium model with firm dynamics. I find that the stationary equilibrium replicates fairly well the distribution of leverage as well as the relationship between leverage, size and profitability. The counterfactual experiment points out relatively small effects of tax benefits on corporate capital structure. It also implies that the effects of the default cost on macroeconomic variables are almost negligible under endogenous capital structure choice.     

The Silent Majority: Private U.S. Firms and Financial Reporting Choices

This study uses a comprehensive panel of tax returns to examine the financial reporting choices of medium-to-large private U.S. firms, a setting that controls over $9 trillion in capital, vastly outnumbers public U.S. firms across all industries, yet has no financial reporting mandates. We find that nearly two-thirds of these firms do not produce audited GAAP financial statements. Guided by an agency theory framework, we find that size, ownership dispersion, external debt, and trade credit are positively associated with the choice to produce audited GAAP financial statements, while asset tangibility, age, and internal debt are generally negatively related to this choice. Our findings reveal that (1) equity capital and trade credit exhibit significant explanatory power, suggesting that the primary focus in the literature on debt is too narrow; (2) firm youth, growth, and R&D are positively associated with audited GAAP reporting, reflecting important monitoring roles of financial reporting; and (3) many firms violate standard explanations for financial reporting choices and substantial unexplained heterogeneity in financial reporting remains. We conclude by identifying opportunities for future research.     

Reducing managers’ incentives to cannibalize: Managerial stock options when shareholders are diversified

We analyze the relative advantage of option grants compared to stock compensation when shareholders are diversified. Our analysis recognizes a conflict that is largely neglected in the corporate finance literature. Shareholders want to maximize their portfolio value while capital budgeting rules direct managers to choose projects that maximize firm (equity) value. Options can reduce this conflict by motivating managers to avoid projects that enhance the value of one firm at the expense of another firm. Also, in our framework, relative performance evaluation destroys value for shareholders as it encourages firms to engage in cannibalistic activity. Consistent with the predictions of our model we find that firms with lower insider ownership, higher institutional ownership, and lower leverage tend to provide more option grants as compensation to their executives.     

Is export tax rebate a quality signal to determine firms’ capital structure? A financial intermediation perspective

This paper empirically examines the casual effect of export tax rebates (ETRs) on firm capital structure. The results of analyzing large panel data on Chinese manufacturing firms from 2007 to 2015 suggest that firms that obtain ETRs are more likely to access leverage. Moreover, ETRs affect the leverage ratio through funding fixed assets investments, smoothing financial costs, and alleviating for internal financing. In addition, ETRs are positively associated with leverage through improvements in firm performance, including firms’ total factor productivity, profitability, and labor productivity. Additionally, the effect of ETRs on leverage plays a stronger role in private firms than in state-owned or foreign firms.